Etika buys Vietnam UHT milk producer

Written by Ellen Lokajaya
Monday, 23 November 2009

The Edge Malaysia

Greater spending power, a more open economy and, of course, the Vietnamese liking for ca phe sua da (iced coffee with milk) is driving Malaysian condensed milk producer Etika International to move into Vietnam in a big way. It intends to set up base there and launch more products across Indochina and North Asia.

In July, Etika acquired Tan Viet Xuan Joint Stock Co, a family-owned dairy milk processor, for US$8.7 million (RM29.5 million). Located in the Cu Chi suburbs of Ho Chi Minh City, Tan Viet Xuan produces ultra-high temperature (UHT) fresh milk, milk products and beverages that are sold in the country under the Vixumilk brand.

“The market in Vietnam is still in its infancy. There’s a big potential to grow because consumption of milk per capita is rela­tively low,” says Kamal Tan, group CEO of Etika.

Tan says Etika had explored the possibility of making a foray into the Indochina market some years ago, when the Vietnamese dairy industry was still tightly regulated. Tan Viet Xuan came into the picture late last year through an introduction by a friend, although nothing happened until a few months ago when negotiations for its acquisition began in earnest.

The deal, which has fuelled interest among analysts and investors over Etika, comes at a time when the company is expanding rapidly from being a manufacturer of milk products to a regional F&B player. One of the world’s largest producers of sweetened condensed milk, Etika now has four main divisions comprising dairies, frozen food, packaging, and nutrition and beverage.

Etika’s dairies division manufactures milk products ranging from UHT milk and sweetened condensed milk to evaporated milk and flavoured milk drinks under its Dairy Champ brand and sells them to wholesalers, supermarkets and coffeeshops in Malaysia and worldwide. In the frozen food segment, Etika’s bakeries and butcheries sell meat and frozen foods to hotels, airlines, fast-food chains and grocery stores under the Gourmessa brand.

For the nutrition and beverage segment, Etika markets branded sports-nutrition and weight-management food products under the Horleys, Sculpt and Pro-Fit brands in New Zealand and Australia, and produces carbonated and non-carbonated Polygold canned drinks and Air Bull energy drinks. Lastly, the packa­ging division manufactures tin cans as well as fully recyclable PET (polyethylene terephthalate) bottles.

Indeed, Etika’s growth has attracted the attention of Malaysia’s Kuok Group, which is headed by 85-year-old billionaire Robert Kuok and has interests ranging from media to property and shipping. In July, Kuok Group’s subsidiary, PPB Group Bhd, raised its stake in Etika to 5% from 4.67%, by exercising its warrants through its indirect wholly owned subsidiary Masuma Trading Co. Currently, Masuma has a 4.99% stake in the company, owing to dilution of shareholding after other shareholders exercised their warrants.

Although the interest shown by Kuok Group has fanned more excitement about Etika because of the group’s extensive interests in staple foods, Tan says so far there has been no collaboration between both companies. In any case, he has already mapped out plans to expand from Vietnam.

Launching pad into China

Apart from exporting its Vixumilk milk products to neighbouring countries like Cambodia and Laos, Etika plans to use Vietnam as a second base to export its products to the Philippines and Northern Asian countries like China.

Meanwhile, there are synergies that Etika and Tan Viet Xuan can exploit. “We can bring in our technology to improve their production and maybe reduce some of the costs,” says Tan. Also, its new Vietnamese unit could bene­fit from lower raw material costs with Etika’s volume purchases, he adds.

In return for Etika’s transferring its know­ledge on sweetened condensed milk production to its Vietnam plant, Tan Viet Xuan could share its expertise and experience in manufacturing ready-to-drink UHT milk with Etika.

Currently, Tan Viet Xuan’s utilisation rate for UHT milk processing is 40%, while its sweetened condensed milk utilisation rate is 20%, says Tan. So, if there is a sudden surge in demand for Tan Viet Xuan’s sweetened condensed milk, the Ho Chi Minh facility can take on the extra processing load without having to increase capex drastically.

Tan Viet Xuan will also be able to tap Etika’s newly acquired expertise in the packaging and storage of UHT milk. In March, the company entered into a joint venture to set up a UHT Aseptic PET bottling plant in New Zealand. The NZ$6 million (RM14.7 million) facility will bottle an assortment of dairy pro­ducts, including vitamin-fortified flavoured milk drinks, lactose-free milk, ready-to-drink liquid infant formula and standard UHT milk for Etika as well as other brands. Stored in plastic bottles instead of cartons or tin cans, these milk products have a longer shelf life and can be transported without refrigeration.

In FY2009 ended Sept 30, Etika’s revenue rose 1.4% y-o-y to RM600.6 million, while earnings jumped 52.4% to RM61.5 million. Tan says although sales volume for its dairy products has risen 16.9% in Malaysia and the company’s export markets, its average net selling price was much lower than that in 2008, as retailers asked for prices to be reduced in line with the fall in most commodity prices.

Overall sales for its dairy products in Southeast Asia fell 7.6% y-o-y, owing to a delay in the processing of customs paperwork to allow the import of condensed milk into Indonesia. Even so, the company’s gross profit margin improved 3.3% as the prices of key raw materials such as skim milk powder, whey powder and palm oil fell.

The company recently acquired PT Vi­xon Indonesia, an Indonesian distributor of its sweetened condensed milk and other consumer items such as medicine and F&B products. Tan says the acquisition will strengthen Etika’s distribution network, especially in Jakarta, where its Dairy Champ sweetened condensed milk is still overshadowed by local popular brands like IndoMilk and Frisian Flag (more popularly known as Susu Bendera). “We do have distributors in Indonesia, but nothing beats our own people and our own organisation there selling and marketing our products,” says Tan.

NRA Capital’s analyst Angelia Phua notes in an Aug 31 research report that the Vietnam acquisition “is expected to contribute positively to Etika’s bottom line by FY2010, although we expect the initial contribution to be meagre”. Phua says once Etika starts improving Tan Viet Xuan’s production efficiency and marketing, profitability should lift further, which would likely “come through only by FY2011”.“New market access of Dairy Champ products into Vietnam is also expected to bring about additional revenue stream to the group,” adds Phua.New products, facilities in Malaysia

Meanwhile, Tan is building up other revenue streams in Malaysia. Etika has just launched a new beverage named Juice Milk, which is milk with 10% to 15% of fresh fruit juice. The new product currently comes in yoghurt, pineapple, apple, orange and cranberry flavours. Although Juice Milk retails at RM2 for a 250ml can, which is more expensive than soda drinks, which cost RM1.50, it offers a much healthier choice, says Tan. In the next couple of months, new flavours like peach and mango will be rolled out.

Etika is also expanding its frozen-food division. The company shifted its bakery to a new 30,000 sq ft plant in Meru, Klang, where it will be able to expand its product range and produce larger volumes of frozen dough and other bakery products for the domestic market and for export in the future. Its butchery has taken over the 12,000 sq ft of space vacated by the bakery. The company also plans to expand its cold room and dry storage facili­ties in Glenmarie, Shah Alam by 3QFY2010 and construct new cold rooms and warehouse facilities in Penang by 2QFY2011.

Tan and his brothers, Etika’s chairman Jaya Tan and Tajuddin Tan, who passed away in 2005, founded the company more than a decade ago. They also own Catalist-traded Lasseters International, which operates resorts, taverns as well as casinos in Australia.

NRA Capital’s Phua says in her research report last week that growth for the company will still come from its dairies division “through better market penetration of sweetened condensed milk under the Dairy Champ brand in existing and new markets [such as Vietnam] as well as the introduction of new products [such as Juice Milk drink and other flavoured milk drink]”.

“In view of strong FY2009 results and a positive business outlook, we have upgraded our FY2010 earnings forecast,” says Phua. For FY2010, NRA forecasts Etika’s revenue to climb 16% y-o-y to RM699.3 million, and earnings to rise 26% to RM77.2 million. For FY2011, it expects the company’s revenue to grow 13% y-o-y to RM792.2 million, and earnings to increase 16% to RM89.6 million.

NRA Capital has maintained its “buy” call on Etika, but has revised its target price to 61.5 cents from 43 cents. Based on current levels, the company is trading at 3.3 times the forecast earnings for FY2010 and 2.9 times that of FY2011.

This article appeared in Corporate page of The Edge Malaysia, Issue 782, Nov 23-29, 2009.